Andrew Luce, CPA •
One of the most commonly used tax savings strategies is done when an individual or employer makes a contribution to a retirement plan. Luckily, as an individual or employer, you still have time to make a retirement plan contribution after December 31st to an employer 401(k), solo 401(k), Self-Employed Pension (SEP), or Individual Retirement Account (IRA) and deduct the contribution on your income tax return. For example, a contribution paid into your retirement plan in 2019 might be deductible on your 2018 income tax return. The following information summarizes some key facts about these retirement plans, including timing and deductibility of retirement plan contributions, among other things:
One of the most commonly used tax savings strategies is done when an individual or employer makes a contribution to a retirement plan. Luckily, as an individual or employer, you still have time to make a retirement plan contribution after December 31st to an employer 401(k), solo 401(k), Self-Employed Pension (SEP), or Individual Retirement Account (IRA) and deduct the contribution on your income tax return. For example, a contribution paid into your retirement plan in 2019 might be deductible on your 2018 income tax return. The following information summarizes some key facts about these retirement plans, including timing and deductibility of retirement plan contributions, among other things:
- Employer 401(K)
- 401(k) plans must be established by fiscal year-end (12/31 for calendar-year plan).
- Generally, 401(k) plans include employer and employee contributions.
- Employee contributions must be made before December 31st each year
- Employer contributions must be made by the due date (including extensions) for filing your federal income tax return for the year.
- When you contribute, you must contribute to the accounts of all eligible participants who actually performed personal services during the year for which the contributions are made, even employees who terminate employment or die before the contributions are made. Eligible employees are defined in your Retirement Plan’s document.
- The employer contribution is limited to 25% of compensation paid to all eligible participants.
- If you have many eligible employees, the cost of making an employer matching contribution can add up quickly, as a result, careful planning is required to ensure your company has adequate cash resources to make the contribution.
- Solo 401(k)
- 401(k) plans must be established by fiscal year-end (12/31 for calendar-year plan).
- Solo 401(k) contributions must be made by the due date (including extensions) for filing your federal income tax return for the year.
- Solo 401(k) typically covers a business owner with no employees or a business owner and his or her spouse.
- Total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed $55,000, for 2018.
- Contributions to a solo 401(k) for self-employed individuals requires a special computation to figure the maximum amount of contributions you can make into your plan.
- Simplified Employee Pension (SEP)
- SEP plans must be established by tax filing date plus extensions.
- SEP contributions must be made by the due date (including extensions) for filing your federal income tax return for the year.
- When you contribute, you must contribute to the SEP-IRAs of all participants who actually performed personal services during the year for which the contributions are made, even employees who terminate employment or die before the contributions are made.
- SEP contributions are the smaller of $55,000 or 25% of compensation based on the first $275,000 of compensation for 2018.
- SEP contributions are always 100% vested, or owned, by the employee.
- SEP contributions are not subject to federal income tax withholding, social security, Medicare and federal unemployment taxes.
- Contributions to a SEP for self-employed individuals requires a special computation to figure the maximum amount of contributions you can make into your plan.
- Individual Retirement Account (IRA)
- IRA accounts must be established by tax filing date but not including extensions.
- Your contributions may be limited if you can participate in another retirement plan through your employer or business.
- IRA contributions must be made by the due date (not including extensions) for filing your federal income tax return for the year.
- IRA contributions cannot be more than (1) $5,500 or (2) your taxable compensation for the year, if your compensation was less than the $5,500 limit.